Are your Distribution Agreements Enforceable?

We have been seeing a number of problems with distribution agreements of late generally falling into one of three categories: a) the contract was unsuitable for the country of distribution, b) the choice of dispute resolution clause was inappropriate for the parties or c) circumstances had changed and the contract no longer covered actual practice.

Typically problems arise when a single contract template is used for every country where the goods are to be distributed.  Firstly there may be issues of language – the words agent and distributor may be used interchangeably whereas legally they are quite different:  a distributor generally buys goods and resells them at his own risk while an agent identifies customers to whom the manufacturer sells directly with the agent receiving a commission.  Sometimes the lines may get blurred with the distributor also taking on tasks for the manufacturer such as attending to the product registrations for pharmaceuticals or providing maintenance or product support for equipment or devices and that may lead to problems if local law provides different termination rules or compensation depending on whether the local representative is deemed distributor or agent.  Ideally the distribution agreement should provide means for mitigating any termination fee.

There may be other local rules that mean your contract is invalid for example in some countries the agreement must be registered with a local agency or must be written in the local language.  Some countries even require that a certain style of contract is used.  Additionally regulated products such as pharma and medical devices may be subject to further country specific rules. These local rules usually take precedence over any contractual provision that the laws of another country apply.

Another common problem is enforcement. A standard template will often provide for dispute resolution before the courts of the manufacturer’s home country.  This may be overridden by the laws of the distribution country but more commonly is simply impractical for if the countries involved do not have a treaty to enforce each other’s judgements and the defendant does not have assets in the country of the courts then it can be very difficult to enforce that judgement.  In these cases it may be better to provide for arbitration which is often more easily enforceable however it is important to select a form of arbitration that is affordable for the parties and proportionate to the size of the dispute. In complex relationships a mediation step may also be worth considering.

Finally long term relationships may evolve over time without reference to the underlying contract either as a result of written instructions or just as a matter of practice and this can make it difficult to use the original contract as a basis for resolution if the relationship does eventually break down

So what should you do?  Ideally you should consider local rules when setting up your distribution agreement, understand what is involved in any arbitration proposal and review your existing contracts regularly to ensure they reflect reality.  Please get in touch if you would like some help with this.

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